How are deposits calculated for tax purposes?

Why businesses request deposits

Deposits serve two important purposes. First, they confirm a client’s commitment to the work, helping to reduce cancellations or last-minute changes. Second, they provide the business with some upfront cash flow to cover initial costs, materials, or planning time.

For example, a builder may need to order timber ahead of a job, a photographer may need to lock in a date and forgo other bookings, or a celebrant may need to prepare documentation. A deposit ensures that time and money aren’t wasted if a client pulls out.

Typical deposit amounts

The size of a deposit varies depending on the industry and the scope of work. Common approaches include:

• Flat percentages – Many businesses request between 20% and 50% of the total fee upfront.
• Fixed amounts – For smaller jobs, a set sum (for example, $100 or $200) may be requested.
• Tiered deposits – For larger projects, staged payments may be used, such as 30% at booking, 30% midway, and the balance on completion.

What matters most is that the deposit amount is clearly stated in the quote, contract, or invoice so that clients understand what they’re committing to.

How deposits are accepted

Deposits can be accepted in a range of ways:

• Bank transfer.
• Credit or debit card payment.
• Cash (though this is less common in today’s digital world).
• Payment platforms such as Stripe.

No matter the method, always issue a receipt or invoice showing that the payment is a deposit towards the total cost of the job. Transparency at this stage avoids disputes later.

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How deposits are treated for tax purposes

This is where things can get confusing. The general rule is that a deposit is considered income when it is received, even if the work hasn’t yet been carried out. That means:

• For income tax – The deposit counts towards your taxable income in the year you receive it.
• For GST – If you are GST-registered, tax usually applies to the deposit at the time of payment, not when the job is finished.

An exception may apply if the deposit is a genuine security bond that is fully refundable and not intended to form part of the final payment. In those cases, it may not be treated as income. However, in most service businesses — such as building work, photography, or celebrancy — deposits are an advance payment and therefore taxable.

What happens if a deposit is refunded?

If you refund a deposit to a client, the accounting needs to reflect this. That means:

• Reducing your income by the amount refunded.
• Reversing any GST previously accounted for.

For example, if you invoiced a $500 deposit plus GST and later refunded it, you would need to adjust your accounts to show that the income and GST are no longer owed.

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What happens if the job is cancelled by the business?

If you, as the business owner, cancel the job and return the deposit in full, the refund is treated in the same way as above — you reverse the income and any tax obligations.

If you keep part of the deposit as compensation, that amount is treated as income and remains taxable. In practice, if you retain $200 of a $500 deposit due to a cancellation, you need to record the $200 as taxable income and account for GST on it.

Best practices for handling deposits

• Be clear upfront – State your deposit terms on every quote, invoice, and contract.
• Separate accounting – Track deposits as a liability until the job is complete, then transfer them to income. Accounting software such as Thriday can automate this for you.
• Issue proper invoices – Even for deposits, include GST where applicable and make sure your paperwork is consistent.
• Document refunds and cancellations – Keep clean records of what was returned, retained, or cancelled.

Final thoughts

Deposits are a smart way to protect your business, improve cash flow, and secure client commitments. But they must be managed correctly from a tax perspective. In most cases, deposits count as taxable income at the time of receipt, and they may also attract GST. Refunds and cancellations need to be accurately recorded to avoid errors with the tax office.

With the right approach — and by using automated accounting tools like Thriday — deposits can be handled smoothly, leaving you free to focus on delivering great work for your clients.